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Digitizing MGM's Roar

By

Michael J. Wolf

Updated April 27, 2004 12:01 a.m. ET

Reports that Sony Corp. and Time Warner Inc. are interested in acquiring Metro-Goldwyn-Mayer Inc. are making media watchers roar: Why would companies as sophisticated as Sony and Time Warner want to increase their investment in the notoriously risky film business? Similarly, with its own deal to buy Universal Studios expected to close as soon as this week, why would a savvy broadcaster like NBC take the plunge?

The answer lies in the fact that the film business now stands poised for a major wave of profitability generated by the rapidly increasing opportunities people have to watch and pay for their favorite films and TV shows -- new and old.

Cable companies, satellite broadcasters, technology and Internet companies are all positioning themselves for a battle over the delivery of digital video services to the home that go far beyond what's available today. Giving consumers access to the contents of massive film libraries like MGM's -- which counts the James Bond and Pink Panther titles among some 4,000 in its vault -- are going to be critical weapons in this contest.

From the studios' perspective, what's needed to take advantage of these multiplying opportunities are strong companies with the marketing, sales and distributor relationships to ensure their products get on the shelf, both physically and virtually. While box office success grabs headlines and critical kudos, it matters less and less in the overall fortunes of a film studio. Home video sales and rentals today generate more than double the box office revenue in North America, fueled by the explosive growth of DVDs through retail sales in stores such as WalMart and BestBuy and clubs like Netflix and Columbia House. DVD players are now in more than half of all U.S. households, and with prices dropping to as low as $29 a player there is still plenty of room for growth at home and internationally.

At the same time, tens of billions of dollars have been invested in upgrading, building and acquiring new broadband platforms to distribute video content, and demand is building. Consumers have been snapping up digital set-top boxes equipped to deliver video on demand (VOD), digital video recorders, and flat-panel, high-definition televisions in unprecedented numbers -- and a new category of personal media players (PMPs) that can easily handle, music, video or photographs is about to hit the market.

As the avenues for consumers to access filmed entertainment expand, the value of motion picture content from all revenue streams should grow some 50% over the next five years from roughly $41 billion today.

The glamour of going to the movies to see the latest releases will continue to be at the core of Hollywood and central to American culture. But the expanding spectrum of video opportunities means a weak opening weekend or a short run in theaters no longer spells certain financial failure for a picture. And where their most popular releases are concerned, studios are already recognizing that they transcend the ways in which audiences enjoy them. Just in the past two weeks, Miramax Films successfully capitalized on the promotion of the DVD release of its "Kill Bill Vol. 1" -- selling $40 million in units on its first day -- which in turn helped "Kill Bill Vol. 2" top the box office when it opened a few days later. When director George Lucas releases his just-announced "Star Wars Trilogy" on DVD this September, it will likely be received with all the fanfare of a Hollywood opening.

Yet fully monetizing Hollywood's vast film libraries will require even more new thinking. For the time being, studios have been holding back the release of their products for VOD in anticipation of better deals with the digital platforms that will distribute them.

Piracy also remains a chief bogeyman, but hopefully the film industry learned the lessons of its music industry counterparts. That means that as new distribution technologies and formats take hold, media companies need to be ready to offer consumers the same selection and ease of use as anything that might be available for free via an illegal download.

These investments in Hollywood are not the old stories of naive outsiders falling in love with the film business, or of media conglomerates trying to conjure up synergies that don't exist. They're about leveraging distribution to realize the tremendous value that can be gained by giving consumers the films and shows they want, regardless of whether they're at the multiplex or in their own living rooms.